Finance Exam 2 Connect questions
A corporate bond's yield to maturity:
- is usually not the same as a bond's coupon rate - changes over time
Which of the following are defining features of the primary market?
- its the market where initial public offerings are made - proceeds from the sale of securities goes to the issuing firm
Which of the following are true about a bond's face value?
-It is the principal amount repaid at maturity -It is also known as the par value
Which of the following are features of municipal bonds?
-The interest on municipal bonds is exempt from federal taxes. -They are issued by state and local governments. -The interest on municipal bonds is, in some cases exempt from state taxes in the state of issue.
As a general rule, which of the following are true of debt and equity?
-The maximum reward for owning debt is fixed. -Equity represents an ownership interest.
Which of the following are true of bonds?
-They are issued by both corporations and governments -They are normally interest-only loans
Which of these correctly identify differences between U.S. Treasury bonds and corporate bonds?
-Treasury bonds are considered free of default risk while corporate bonds are exposed to default risk. -Treasury bonds are issued by the US government while corporate bonds are issued by corporations. -Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer.
What are the two unique features of a U.S. federal government bond?
-US Treasury issues are considered to be a default-free -US Treasury issues are exempt from state income taxes
What is a corporate bond's yield to maturity (YTM)?
-YTM is the expected return for an investor who buys the bond today and holds it to maturity -YTM is the prevailing market interest rate for bonds with similar features
The NYSE differs from the NASDAQ primarily because the NYSE has:
-a face-to-face auction market -a physical location
Which of the following are bonds that have actually been issued?
-a put bond -a convertible bond -a CoCo bond
The sensitivity of a bond's price to interest rate changes is dependent on which of the following two variables?
-coupon rate -time to maturity
A key difference between interest payments and dividend payments is?
-interest is tax deductible -dividends are not tax deductible
In an over-the-counter market, which of the following is true?
-many dealers are also connected electronically -most of the buying and selling is done by the dealer
If you are holding a municipal bond that is trading at par to yield 6%, by how much will your after-tax yield change if your federal income tax bracket increases from 15% to 20%. Assume there are no state or local taxes
0%
If you are in the 20% federal income tax bracket, what is your after-tax yield on a municipal bond that is currently trading at par to yield 5%. Assume there are no state or local taxes.
5%
Crossover bonds can also be called _____ bonds.
5B
What is a premium bond?
A bond that sells for more than face value
A corporation receives cash from financial markets by selling ______ and ______.
Bonds and stocks
What are crossover bonds?
Bonds that have both an investment grade and a junk bond rating
What are "fallen angel" bonds?
Bonds that have dropped from investment grade to junk bond status
What is a discount bond?
Bonds that sell for less than face value
As an investor in the bond market, why should you be concerned about changes in interest rates?
Changes in interest rates cause changes in bond prices.
What is a bond's current yield?
Current yield = annual coupon payment / current price
Websites that allow investors to trade directly with one another are termed _______.
Electronic Communications Networks (ECNs)
Which of the following is not a difference between debt and equity?
Equity is publicly traded while debt is not
True or false: Daily stock prices can only be found by looking up the stock in newspapers.
False
True or false: The higher the coupon rate, the greater the interest rate risk, all other things being equal.
False
What is the definition of a bond's time to maturity?
It is the number of years until the face values are paid off
The two most important stock markets in the U.S. are the New York Stock Exchange and ______.
NASDAQ
Which of the following is true of zero coupon bonds?
No coupon payments are made on the bonds
Which of the following variables is NOT required to calculate the value of a bond?
Original issue price of bond
What four variables are required to calculate the value of a bond?
Par value Coupon rate Time remaining to maturity Yield to maturity
What are the cash flows involved in the purchase of a 5-year zero-coupon bond that has a par value of $1,000 if the current price is $800? Assume the market rate of interest is 5 percent.
Pay $800 today and receive $1,000 at the end of 5 years -Zero coupon bonds do not pay periodic interest.
What does a bond's rating reflect?
The ability of the firm to repay its debt and interest on time
If you are holding two bonds - one with a 5% coupon rate and the other with an 8% coupon rate - which one is more sensitive to interest rate risk, all other things being equal?
The bond with a 5% coupon rate
What does the AAA rating assigned by S&P mean?
The firm is in a strong position to meet its debt obligations
Which of the following defines the primary market?
The primary market is where stocks are issued for the first time.
The US government borrows money by issuing:
Treasury notes and treasury bonds
A bond's coupon payment is:
a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders
The coupon payments on floating-rate bonds are _____.
adjustable
In an efficient market ______ investments have a _____ NPV.
all; zero
If the market changes and stock prices instantly and fully reflect new information, which time path does such a change exhibit?
an efficient market reaction
To find the total bond value, add the present value of the amount paid at maturity to the _____ of the annual coupon payments.
annuity present value
The New York Stock Exchange is an
auction market
A person who brings buyers and sellers together is called a(n) ______.
broker
A provision in the bond indenture giving the issuing company the option to repurchase the bonds before maturity is termed a _________________.
call provision
A bond's ______ payment is a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders.
coupon
Someone who maintains an inventory of stocks and buys and sells those stocks is known as a ____.
dealer
When interest rates in the market rise, we can expect the price of bonds to ____.
decrease
Debt cannot be subordinated to
equity
In an efficient market, firms should expect to receive ______ value for securities they sell.
fair
True or false: A debenture is a bond secured with collateral.
false
True or false: Bond ratings are concerned only with the possibility of price changes.
false
True or false: Bonds that have dropped into junk territory are called "trash" bonds.
false
A limitation of bond ratings is that they ____.
focus exclusively on default risk
If a bond is selling at a discount from its par value, the YTM must be _____ the coupon rate.
greater than
A bond with a BB rating has a ______ than a bond with an BBB rating.
higher risk of default
"Inside Quotes" represent the _________ and the ________.
highest bid price; lowest ask price
An efficient market is one in which any change in available information will be reflected in the company's stock price ___.
immediately
When interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows ____.
increases
An efficient market is one that fully reflects all available ______.
information
Stock prices fluctuate from day to day because of:
information flow
Stock price reporting has increasingly moved from traditional print media to the ______ in recent years.
internet
What will happen to a bond's time to maturity as the years go by?
it will decline
The bonds of a firm in financial distress may have a market value that is _________ than the face value at maturity.
less
If a $1,000 par value bond is trading at a discount, it means that the market value of the bond is ______$1,000.
less than
When using trial and error to compute the yield to maturity (YTM) for a 6 percent coupon bond that trades at a premium, the process can be shortened if the initial guess is ____ 6 percent.
lower than
A zero-coupon bond is a bond that ____.
makes no interest payments
Bonds issued by state and local governments are called _______ ______.
municipal bonds
The fundamental business of the New York Stock Exchange is to attract _______.
order flow
Which type of stock price adjustment time path occurs when there is a bubble (price run up) in the path followed by a decline after the market receives information about the stock?
overreaction and correction
Equity represents a(n) _______ interest of a firm.
ownership
Shares of stock are first brought to the market and sold to investors in the ___________ market.
primary
A part of the indenture limiting certain actions during the term of the loan are termed ________.
protective covenants
What are the two major forms of long-term debt?
public issue and privately placed (issue)
The trading of existing shares occurs in the ______ market.
secondary
When one owner or creditor sells to another, the transaction takes place in the _________ market.
secondary
If a study of a firm's financial information will not lead to gainsterm-28 in the market, then the market must be at least _____ efficient.
semi-strong form
Which type of debt is given preference in the event of default?
senior
New York Stock Exchange Designated Market Makers (DMMs) were formerly called ________ .
specialists
If you are holding two identical bonds, except that one matures in 10 years and the other matures in 5 years, which bond's price will be more sensitive to interest rate risk?
the 10-year bond
Bond ratings are based on the probability of default risk, which is the risk that ___.
the bond's issuer may not be able make all the required payments
The degree of interest rate risk depends on ____.
the sensitivity of the bond's price to interest rate changes
Junk bonds have the following features:
they are rated below investment grade bonds
What is the primary objective of an auction market?
to bring buyers and sellers together
If a $1,000 par value bond is trading at a premium, the bond is:
trading for more than $1,000 in the market
True or false: A put bond allows the holder to force the issuer to buy the bond back at a stated price.
true
True or false: All else being equal, a one-year bond's price is less sensitive to interest rate changes as compared to that of a ten-year bond's price.
true
True or false: Long-term debt has maturities greater than one year.
true
True or false: Longer-term bonds have greater interest rate sensitivity because a large portion of a bond's value comes from the face amount.
true
True or false: Low-grade bonds may not be rated by major rating agencies.
true
True or false: The government sells Treasury notes and bonds to the public every month.
true
True or false: Zero coupon bond calculations use semiannual periods to be consistent with coupon bond calculations.
true
A debenture is a(n) _____ bond, for which no specific pledge of property is made.
unsecured
The efficient markets hypothesis contends that _____________ capital markets such as the NYSE are efficient.
well-organized
Most of the time, a floating-rate bond's coupon adjusts ____.
with a lag to some base rate
ABC Co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of these bonds?
$60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years.
Which of the following terms apply to a bond?
- Time to maturity - Coupon rate - Par value
